RICH BERNSTEIN: People Become Visibly Disappointed When I Tell Them About The Best Investment Opportunity In The World

Sunday

Jul 27, 2014 at 4:25 PM

Myles Udland

"Somebody asked the other day what the world's best investment opportunity is, and when I told him, he was visibly disappointed," said Rich Bernstein of Bernstein Advisors.

Bernstein was talking about high-yield municipal bonds.

Investors in the bond market currently prefer investing in Iraq over U.S. municipalities.

As of Wednesday, Republic of Iraq bonds due in January 2028 were yielding 7.08%; high-yield municipal bonds in the U.S. were yielding 1.9% more than Iraqi bonds. (Per data provided by Bernstein: "BarCap Municipal Custom HY Composite Yield to Worst. Current yield is 5.41%, tax-equivalent yield of 8.96% assuming 39.6% tax rate.")

That spread implies that investors think Iraq is less likely to default than some U.S. municipalities.

This fascinating stat, shared by Bernstein, highlights why high-yield municipal debt, or "munis," is what Bernstein calls the best investment opportunity anywhere in the world.

"Everybody thinks every municipality is going bankrupt," Bernstein said at a recent breakfast attended by Business Insider. "It's just not true. We're going through a very normal cycle in municipal finance. An accentuated cycle, admittedly, but a normal cycle."

Municipal defaults, which have been in the headlines in recent years following Detroit's bankruptcy and continued concerns over the health of Puerto Rico's finances, peaked two years ago, Bernstein said.

Municipal defaults were partly triggered by pressure from declining tax revenues and underfunded pensions. Bernstein noted, however, that with U.S. 10-year Treasury bonds yielding 1.35%, which is where they were in summer 2012, "it would have been a miracle to see public pensions overfunded."

But as the cycle turns, Bernstein said, and tax revenues increase, interest rates increase, and asset values in pensions funds increase, the financial health of municipalities will improve.

Municipal bonds can also offer investors another incentives, as interest earned from municipal bonds is often tax-exempt.

Even leaving out this benefit, however, at least one adviser sees an obvious investment opportunity right here in America.

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